Some Unconventional Thoughts on Investing for Your Retirement

When I first started in financial planning, this would be back in the 1980’s, investing for your retirement was simple. When you were young, the theory went, you dutifully started putting away a little bit of your salary each month. The amount was as high a percentage of your income as you could manage. It was supposed to be a sacrifice. Give up something now to have something later.

You invested in the stock market, of course. Equity returns were the way to go and you had plenty of time to ride out cyclical fluctuations. Your risk return profile indicated a higher acceptance of risk.

You also bought a home. This was more a place to live than a retirement investment. Still, it increased your net worth.

As you got older you still kept investing something every month. Only now, as your risk profile changed because of age, you moved out of equities and started purchasing safe corporate bonds. You still had your home. Perhaps you had up-sized your house and/or purchased a vacation cottage. Either way your net worth kept increasing.

As the day for your retirement arrives, you put all of your investments into a 100% safe money market account. This includes the proceeds from the sale of your home after the kids left and you downsized.

It was all so simple then…

The Great Fall-Out:

Then along came 2008!

For many, 2008 was the year that wiped away all of our sacrifice for retirement and changed the rules for retirement investing forever.

In 2008 we learned that our retirement savings in the stock market could be reduced by 50% nearly over night. Years of sacrifice were rendered meaningless. Many homes and other real estate investments went under water and still have not recovered and one money market, Reserve Primary Fund, broke the buck, challenging the perceived safety of money market funds.

Investing for Your Retirement the New Way:

So now what are we to do? How are we to plan and invest for retirement? We all did what we were supposed to, followed expert advice (my own included) and sacrificed our today for the future, only to have that sacrifice negated. Should we continue to play by the very rules that violated us?

Further, if we choose to play by those rules, where should we invest? The stock market, thanks to quantitative easing and the Federal Reserve, is hopelessly overvalued and due for a massive correction. Corporate bond yields as well as money market interest rates are so low that it costs more to go to the bank than you make on your returns.

Real estate? Don’t get me started!

To my mind there is only one solution to the retirement investment dilemma. But you need to have an entrepreneurial mind set to do it. That answer is to develop a large number of diverse passive income vehicles. Only with income coming in from different sources, none of which require your effort, will you really be able to retire.

I recognize that no passive income opportunity is ever truly passive or work free, so following this advice you will not ever really retire. But then, the world has changed a lot since 2008 and I’m not really sure that the classic definition of retirement is still a reality anyway.

The only other option is to go old school.

Put a little bit of every pay check into an investment portfolio and pray that the economy does not tear itself apart again. Your investment type should be determined by your age. The amount, a constant percentage of your income.

If you are going to follow this path there are two things that you have to do. First, diversify. Then diversify some more. Put your eggs into as many baskets as you can. Then pray that traditional financial principles will apply and that as one sector crashes another will skyrocket, leaving you with your principle intact.

Second, watch your investments, like a hawk. Back in the good old days you could let someone else, like a mutual fund manager, watch your investments. Those folks proved themselves to be useless pack animals, so going forward, it is your responsibility to watch your investments.

Everything has changed. Nothing is as it was. New approaches and ideas are demanded. You have not only to think outside of the box but realize that the color, size and shape of the box has changed. This is true in retirement investing as well as most other areas of finance.

Good luck with investing for your retirement and building that nest egg.

Brad holds an MBA, is a former financial analyst and Wall Street Executive. He regularly contributes to http://www.howtosavemoney.guru, a personal finance website dedicated to helping people save money and find financial freedom.

Comments

I think having multiple streams of income, so that you aren’t relying on just one source is always a good idea. With that said, I feel that the stock market is still the best solution for saving for retirement. Yes, the stock market tanked in 2008, but just like it always has in the past, it came back. Therefore, I don’t pray that my money will be OK in the stock market, I know it will be. I just tune out the news trying to get me to be emotional and let my money grow for the long term.Jon @ Money Smart Guides recently posted..Ready For Zero Review

I’m also a big fan of getting into the stock market, but I also appreciate that having as many diverse sources of income is going to be the best method of minimizing your risk and preparing for the future.Glen @ How To Save Money recently posted..Cook Your Own Meals and Save Money

I think using a buy and hold (long-term) investment strategy is best. If the markets go down 40% just keep adding to them, as eventually what goes down must come up. Obviously some stocks and or funds might fail completely, and the only way to safe guard this is to diversify into different sectors, and do not place to much into one asset. For example you would never want 75% of your money invested in 1 stock. Keep each individual investment in the 15% or under range as a total of your Nest Egg.EL @ Moneywatch101 recently posted..An Oath To Fatherâs Day

I like to mix up my buy and hold Vs the short term. I would rather get in and out of a stock and ensure profit, than ride out big losses waiting for things to get better.Glen @ How To Save Money recently posted..Cook Your Own Meals and Save Money

I have read your blog for awhile and like what you have to say, but strongly disagree with a lot in this guest post. 2008 did not show that you cannot invest in the stock market for retirement, it showed that you shouldn’t be results oriented and deviate from your long term plan based on short term results. The ones that were crushed in the crash were those that sold at the bottom, the ones that simply held on have more than made back the money lost there. Was it scary for people to lose so much money in such a short period of time? Absolutely, but you should never let emotions drive your investment decisions.

Further, putting your eggs in as many baskets as possible is horrible advice when combined with “watch your investments like a hawk,” because as you diversify into more and more markets, you simply cannot be an expert in all of them, which is required if he wants us to actively manage those investments.

This “watch it like a hawk” attitude is what causes emotional investing. Instead, we have to be hands off and not get too wrapped up in the short term fluctuations.
1. Invest in yourself to increase your own earning power which will be compounded over your entire career
2. Put your 401k./IRA into a vanguard target retirement fund. Contribute every year and don’t mess with it.
3. Set aside additional income to allow you to develop the skills it takes to earn “passive” income.
4. Forget the idea that you can easily have multiple streams of passive income, because each individual stream requires significant expertise [and time] to achieve.

Finally, if he is so confident that “The stock market…is hopelessly overvalued and due for a massive correction,” then the absolute best [and truly passive] investment is to short the market.

Again, I am a fan of your blog and know this wasn’t written by you, but feel like this specific advice is fairly dangerous to give as it promotes a counter productive mindset.Andy Baldacci recently posted..My First Blog Post!

I’m sorry you didn’t like the post, but thanks for the feedback, I’ll be sure to send it on to Brad.

Just a few points that I would like to add regarding what both you and Brad have said.

I fully agree that you should never get emotionally attached to your investments, it’s rule #1. However I disagree that you shouldn’t be cognisant of short term results/fluctuations.. I personally love both investing and trading in the stock market, and I do quite well for myself, but I have very strict rules when it comes to my main stocks where over 75% of my capital is held. As soon as one dips through a predetermined support point,
I have automatic sells in place to conserve my capital. That way if a stock turns around and the new trend is confirmed, I can jump back in and make even bigger gains than if I held on through the fall.

Holding a stock and hoping it would come back like say Bear Stearns, Lehman Brothers Holdings Inc or Fannie Mae would result in some pretty terrible losses, whereas if you got out once they broke through support you would still have the bulk of your capital ready to move into something that may increase in value.

I personally don’t rate the hold and hope strategy, and would much rather actively manage my own investments to ensure I have enough money to retire with.

The only other thing I will mention is that I believe that you can diversify into many different investment opportunities, without struggling to pay attention to them all.

I personally regularly invest in stocks, commodities, currencies, both passive and non passive income generating websites, property and my own career, where I am an expert in a very technical IT/Electrical Engineering niche known as 61850 and station bus plus many other technologies.

Am I busy with all of that?
Without a doubt, but I think it goes to show that it is possible to both understand as well as actively manage a diverse set of investments – and be successful at the same time.

Anyway, thanks again for the feedback and your point of view. I would love to chat more with you about some of these points via email if you are interested – thanks GlenGlen @ How To Save Money recently posted..Drive a Fuel Efficient Car to Save Money

My father is nearing the age of retirement and he’s been thinking of investment opportunities which can help him after his retirement. These tips sounds wonderful! I’ll make him read this article, it can be very helpful to him. Thank you for sharing this!Alexis Smith recently posted..How to Become a Phone Actress

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